Franchise Law Update : Fox Rothschild Law Firm: Franchise Lawyer & Attorney: Franchise Law, Legal Decisions, Regulatory Compliance

Okay. We've all seen it. The disgusting, disturbing photo a Taco Bell employee posted to Facebook depicting himself licking a stack of taco shells. Turns the stomach of this Taco Bell enthusiast (who knew one needed Doritos Cool Ranch locos tacos--genius, Taco Bell, just genius). It reminds us, of course, of the infamous Domino's Pizza and Burger King employees who engaged in similarly disgusting behavior. Such conduct brings shudders to all of us involved in helping our clients build strong brands.

While I think that social media on the whole is a force for good, it does, unfortunately, enable folks who--intentionally or not--have negative designs on your brand to act on those negative vibes. The question is, of course, how to ensure the productive and positive use of social media by everyone: franchisors, franchisees, employees and customers.

For the past two years, I have hosted Roundtable discussions at the IFA Convention on social media law. The discussions have been energetic, and a number of key themes have emerged from those discussions:

1. Franchisors and franchisees need to be choosy and savvy. This may seem like stating the obvious, but problems start at the beginning. Due diligence about the types and extent of social media used by a franchise system is important, and the social mediums should be tailored to the business. For example, geolocational services might a short time ago been seen as something only for impulse purchases like frozen desserts but now may impact businesses like mobile window cleaning.

2. Write it down. I cannot stress this enough. Write down your system's social media policies, add it to the system operating manual, and make sure you get signed receipts acknowledging receipt of and a promise to adhere to the policies. I hear from some franchisors that they think they can't have such policies because they have long-term agreements with franchisees written before the explosion of social media. In that case, your contract clauses regarding a franchisee's use of the brand's trademarks, copyrights and other intellectual property often provide a vehicle for adoption and enforcement of a social media policy. You write down your business plan and your budgets; don't make your treatment of social media any different.

3. Maintain Control. Orphan sites containing outdated information about locations, contact information, and owners abound. They hurt the brand. Franchisors must ensure its policy provides the franchisor owns any website, blog site, Twitter account, Facebook account, and/or any
other site created on a social media platform involving the brand.
Equally important, the policy must require franchisees to provide, and update, their franchisors with the then-current passwords for any social media involving the brand. This requirement should be included in the list of franchisee obligations in the franchise agreement. At the same time, it is the responsibility of the franchisor to offer robust and suitable social media options for the use of franchisees.

4. Guidance, Maintenance and Training. Franchisors train their franchisees on everything from site selection, to store layout, to accounting. That list must include social media. The brand's presentation of its mythos and ethos should be consistent across all platforms. This would of course include an explanation of what it is legal and illegal, such as compliance with the advertising and financial disclosure requirements of the FTC, and an explanation that employees' private chat rooms are private and do not justify adverse action against employees. It may also include things like ensuring that photos of a child day care or art studio system do not disclose personal information. Maintenance of the policy further requires vigilance on the part of the franchisor so as to ensure the guidelines are followed.

5. Careful selection and training of employees in the brand's social media policies. Again, while this sounds obvious, the Taco Bell example demonstrates what happens when someone who does not respect the brand is hired. Enthusiasm and respect for the brand are infectious. When strong policies are combined with effective training and vigilance of employees who believe in the brand, employees become brand ambassadors.

The above five items are the key to legally protecting your brand in the social media era. I also think they provide a road map for an essential, effective policy. I welcome your comments or suggestions regarding this topic.

• Print
• Comments
• Trackbacks
• Share Link

Legislation is being considered in Maine by the Maine Senate’s Committee on Labor, Commerce, Research and Economic Development as LD 1458 – “An Act to Enact the Maine Small Business Investment Protection Act”. The Act’s goal is to promote “fair franchising” – generally by giving franchisee’s rights outside the terms of the franchise agreements, effectively overwriting those agreements. Some of the provisions are similar to those already enacted by other states, like New Jersey, which includes protections for franchisees against an unfair termination or refusal by the franchisor to renew the franchise, but the Maine Act goes far beyond that.

For example, the Maine Act provides that the franchisor must “deal fairly and in good faith” and “exercise due care” with a franchisee or any franchisee association in “all matters, including, without limitation, transfer of the franchise, administration of advertising funds, rewards programs and marketing funds and the interpretation, administration and performance of franchise and area development or territory agreements” (1299-D. 6.D.)

Another provision requires that a franchisor may not “Sell, rent or offer to sell to a franchisee any product or service for more than a fair and reasonable price or without the reasonable expectation that the sale or rental of the same will promote the profitability of the franchisee’s business” (1299 – D.6.E.)

The Act adds an obligation for the franchisor to exercise a “fiduciary duty” in performing certain services on behalf of the franchisee and in its administration and control of any advertising, marketing or promotional fund to which the franchisee’s contribute (1299-E.1.).

And finally, in addition to many other provisions, it limits the ability of the franchisor to enforce a post-term non-compete. The Maine Act would allow the franchisor to prohibit the a franchisee who has left the franchise system from using the franchisor’s intellectual property and to require the franchisee to de-identify the premises, but, if it is a cookie business, it seems to me that the franchisee could continue to sell cookies – though arguably they would have to tweak the recipe a bit.

As I said, these are only a few examples of provisions in the Maine Act. I feel that many of the provisions including those cited above will encourage complex litigation as the interpretation of “fair dealing”, “due care”, “fair and reasonable prices” and/or “fiduciary duty” to name a few are too ambiguous. In addition, I think that weakening the ability of a franchisor to enforce a non-compete could do substantial damage to other franchisees in the system.

Of course, we all want franchisors and franchisees to deal fairly with each other, but this act, in my opinion, goes too far.

• Print
• Comments
• Trackbacks
• Share Link

The Supreme Court of Washington issued a recent opinion reminding us that, even after Conception, arbitration clauses must be fair in order to be enforceable. While not in the franchise context, the court's decision in Gandee v. LDL Freedom Enterprises offers guidance for those who wish to draft enforceable arbitration clauses.

Gandee and LDL entered into a debt adjustment contract in the state of Washington, where Gandee lived. LDL was not registered to do business in Washington. Three years later, Gandee filed a class action lawsuit against LDL, alleging that it charged excessive fees under Washington law and violations of the Washington Consumer Protection Act (CPA). A few months later, LDL moved to compel arbitration pursuant to the parties' contract.

The arbitration provision read in its entirety:

Arbitration. All disputes or claims between the parties related to this Agreement shall be submitted to binding arbitration in accordance with the rules of [the] American Arbitration Association within 30 days from the dispute date or claim. Any arbitration proceedings brought by Client shall take place in Orange County, California. Judgment upon the decision of the arbitrator may be entered into any court having jurisdiction thereof. The prevailing party in any action or proceeding related to this Agreement shall be entitled to recover reasonable legal fees and costs, including attorney's fees which may be incurred.

The contact also included a severability clause, requiring the enforcement of any provisions of the contract not held to be invalid or unenforceable.

While it started out by recognizing the strong preference for enforcement of arbitration clauses under both federal and state law, the court found that the entire arbitration clause was unenforceable because unconscionable terms pervaded the arbitration agreement. Specifically, the court found:

• The requirement that the arbitration occur in California would cause Gandee prohibitive financial hardship, as the cost of arbitration for Grandee, an unemployed individual, would be significantly higher than any potential recovery.
• Because the CPA already provided Gandee with her costs and fees if she prevailed, the "loser pays" clause in the contract benefited only LDL and, as such, was contrary to the intent of Washington's legislature when it enacted the CPA.
• The shortening of the statute of limitations from four years to 30 days was unreasonable.

Given that 3 out of the 4 short clauses of the arbitration clause were found invalid by the court, only a general "agreement to arbitrate" existed after the court's review. Consequently, the court concluded it could not reasonably sever the unconscionable clauses. Thus, it invalidated the entire arbitration clause.

The court further rejected LDL's offer to "waive" the unconscionable clauses, stating that such offers would permit parties to load their arbitration clauses with unconscionable clauses that would likely be dropped only after challenge in court. Such a process would encourage one-sided agreements and be inconsistent with the principle--especially adhesion contacts--should be conscionable and fairly drafted.

Finally, the court rejected LDL's argument that the entire matter was preempted by Concepcion. Significantly, the court found that the arbitration clause in Concepcion contained several provisions favorable to the consumer, as opposed to its conclusion that the LDL arbitration clause contained many unconscionable provisions. In sum, the Washington Supreme Court concluded the Concepcion Court overturned a overbroad rule that invalidated an otherwise valid arbitration clause. Because the LDL clause contained many unenforceable provisions, Concepcion neither preempted analysis of the arbitration clause by Washington courts nor required enforcement of the arbitration clause.

What the Gandee case boils down to, then, is fundamental fairness. Even after Concepcion, it appears that courts will continue to examine arbitration clauses in the first instance to ensure, as the Washington Supreme Court explained it, they are not "one-sided" or "harsh". While the meaning of such phrases is obviously a judgment call, Grandee offers guidance from at least one state's highest court regarding where the line will be drawn.

• Print
• Comments
• Trackbacks
• Share Link

On April 16, 2013, the California Senate Judiciary Committee, voting along party lines 5 to 2, reported Senate Bill No. 610 (pdf) out of committee to the California Senate Floor.

This bill would amend the California Franchise Relations Act to add certain provisions to the Act.  The original Act was enacted to govern the relationships between franchisors, subfranchisors and franchisees in California in order to prevent unfair practices in the termination, renewal or transfer of a franchised business.  See California Corporations Code, Division 8, Chapter 5.5, Sections 20000 through 20043.

The new bill, if passed, would strengthen the franchisee's rights under the Act by adding the following provisions:

1. Add the standard of "good faith" to govern the dealings of parties to a franchise agreement in the enforcement and performance of the franchise agreement.  Good faith is defined in the bill as "honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade". 
2. In addition, a franchisor or subfranchisor cannot restrict a franchisee's right to join or participate in a franchisee association to the extent prohibited by existing law.
3. Provides for a private right of action for breach of the above-described provisions for damages, rescission or other relief the court deems appropriate and clarifies that the court may increase the award to three times actual damages sustained, as well as reasonable costs and attorney's fees to a prevailing plaintiff.  Note that this does not say the prevailing party - just the prevailing plaintiff.
4. Allowing any franchisor or subfranchisor who becomes liable under these provisions to recover contributions from any other person who would have been liable under these provisions if sued separately.

As one would expect, there is much interest in this bill and vigorous arguments are being made on both sides by industry associations.  Pro, of course, argues that the franchisor/franchisee relationship gives too many rights to the franchisor and that this will level the playing field. Click here for more "pro" arguments.  Con argues that it will weaken the franchisor's ability to protect its brand's integrity, which benefits its system and franchisees, by preventing the franchisor from being able to pursue remedies against underperforming franchisees and will, ultimately, harm consumers.  Click here for more "con" arguments "con".

We will keep you posted on developments with this legislation.

• Print
• Comments
• Trackbacks
• Share Link

In an important decision today, the United States Court of Appeals for the D.C. Circuit struck down a controversial rule requiring employers to post information respecting their employees' right to unionize.  The Court sidestepped a key question of the controversy, and the controversies engulfing the Obama Administration's recess appointments to the National Labor Relations Board in general, by not making a decision about whether the Board had the power to mandate the posters.

Instead, the Court of Appeals noted that the National Labor Relations Act ensures an employer's right to speech so long as that speech does not contain threats. Consequently, the Court reasoned that the Act also gives employers the right to remain silent. Therefore, the Board's decision to mandate the posters was tantamount to mandating speech, which violated employers' right to remain silent.

This is the first appeals court to issue a ruling on the rule. Another appeal is presently pending before the Fourth Circuit Court of Appeals. The text of the D.C. Circuit's opinion in National Association of Manufacturers et al. v. National Labor Relations Board et al. can be found by clicking  this link (PDF).

• Print
• Comments
• Trackbacks
• Share Link

Contributed by Chris Kinkade

Only the owner of a trademark has standing to enforce rights under that trademark (limited exceptions exist, such as for exclusive licensees).  This may seem like common sense, but all too often shareholders and executives of companies file for trademark registration in their own personal names.  Not only does this devalue the company by depriving it of assets, but also it could hinder or outright prevent the company from enforcing its rights against competitors using the same or similar trademark.  It could also jeopardize the validity of the trademark registration.

For a franchisor, brand name and trademark rights are of paramount importance and form the foundation of the franchise.  Having a lose stone that invalidates or inhibits protection of that brand can be catastrophic.  Franchisors should periodically self-audit their trademarks (preferably with the assistance of qualified counsel). Such audits should only to make sure that ownership and licensing rights are appropriate, but also to make sure quality control is maintained.  Franchisors also need to police their franchisees to make sure that any new trademarks are approved by and assigned to the franchisor (subject to any other agreement among the parties).  To aid in this effort, trademark watch services can be employed to monitor new filings incorporating the franchisor’s brand.

Federal district courts have held that a company does not have standing to assert infringement of a registered trademark where the registration is not in the company’s name, even if it is in the name of a sole shareholder.  In a recent case (Inflatable Zoo Inc. v. About to Bounce, No. 12 CV 1709 (E.D. La. Apr. 11, 2013)), the plaintiff had been doing business under a registered trademark for over 20 years before the defendant (a customer) started using the same trademark.  The court dismissed the plaintiff’s federal trademark infringement and cybersquatting claims because the registration was owned by the sole shareholder of the company, not the company itself.  Since individuals and businesses are distinct legal entities, the company could not enforce the registration.

A trademark registration may be invalid if the owner is not the person or entity that controls the nature and quality of the goods and services provided under the trademark, which is typically the company providing the goods or services or, in a franchise relationship, the franchisor.  In the case of a sole shareholder that is also the managing director of a company, that person likely controls the company to be a valid owner of trademark rights (although this may not be wise for at least the reasons discussed above).  However, a shareholder or executive of a company who does not control the company’s goods and services is likely not appropriate to list as the owner of the company’s trademarks.  Likewise, a franchisee is likely not a proper owner of a mark that is utilized by the entire franchise.

Trademarks are extremely valuable and potentially perpetual assets and should always be treated as such.  Although the electronic forms for federal trademark applications may be easy to fill out and file online, and there are many firms that act as drop boxes for trademark applications, business owners and decision-makers should strongly consider consulting with a trademark lawyer who can provide guidance on how to best protect their assets, not simply obtain certificates of questionable value.  Anything worth doing, is worth doing right.
 

• Print
• Comments
• Trackbacks
• Share Link

Much has been written speculating about why Ron Johnson failed--spectacularly--at J.C. Penney. What makes the episode so surprising was that Ron Johnson was not a retail novice. His successes as an executive at Target and in building the Apple Store system are, if not legendary, at least most impressive.

Much has been made of Johnson's decision to adopt a fair pricing retail strategy and make J.C. Penney into a hipper retailer--re-branding it as "JCP", for example. Frankly, I think that such articles give too little credit to the modern American consumer. Do these commentators really believe that customers cannot figure out when they are getting a fair everyday deal, as opposed to marked-up pricing and artificial sales?

I mean, Dillard's converted to a fair pricing strategy in the late-1980s. While it has regularly tweaked its strategy by offering, for example, deep discounts on slow-selling merchandise, it has not failed, growing into a very successful regional department store chain. And, as many people have correctly noted, J.C. Penney's stores had problems prior to Johnson's arrival--especially compared to rivals like Kohl's and, yes, Target. I think that Johnson's failure at J.C. Penney was much less prosaic than customers turning away from a fair pricing strategy they--allegedly--did not understand.

I began to be concerned about the new "JCP" last summer when I overheard my wife talking to some of her friends about JCP. A brand-new JCP had opened at the mall, taking over space formerly occupied by Boscov's. And these mothers were complaining that they couldn't find anything to buy in the new store. They were not suggesting the layout was poor. No, they were saying the merchandise selection was unappealing to them. These customers were core JCP customers: professional, middle-class, suburban mothers who shopped and found plenty of worthwhile merchandise at Target, Kohl's and Macy's. And they couldn't find a single thing to buy at JCP.

Unfortunately, I had overheard such comments before. For my mother's friends, in the late 1980s, when Sears embarked on a similar "fair" pricing strategy but was equally undone by poor merchandising.

What is now coming out is that the new JCP failed to understand its customers, and made wholesale merchandising changes without either making sure it had new customers or that those merchandising changes pleased its current customers.  For example, the Wall Street Journal recently reported that JCP last summer eliminated the St. John's Bay brand of women's clothing (sub. req.), along with all of the staff behind the brand. St. John's Bay was a billion dollar brand for JCP--itself a $17.5 billion company in annual sales prior to Johnson's arrival. But it, and hundreds if not thousands of jobs supported by the brand, were summarily eliminated.

So, when I hear pundits talk about the failure of Ron Johnson's pricing strategy, I pause and think what really failed was his merchandising strategy. And that failure appears to have been driven by a distinct failure to understand his customers, and what his customers wanted. The lesson is important for all retailers, including franchising systems. The good news is that franchising has great leaders like Andy Puzder and David Novack, just to name two, who remind us through success that staying laser-focused on our customers' needs is essential.

• Print
• Comments
• Trackbacks
• Share Link

Just this morning, the FTC updated its Compliance FAQs respecting the Children's Online Protection Privacy Act (COPPA). The updates are intended to address the revised Rule implementing the Act, which will go into effect on July 1, 2013.

The FAQs are principally intended to assist  compliance with the four new categories of information added to the Rule's definition of "Personal Information":

• Geolocational Information: The Rule now provides that all geolocational information must have parental consent, whether obtained before or after the implementation date.
• Photos or Videos or Audio files containing images or audio of children: If collected prior to the date of the amended rule, consent is not required, but strongly suggested by the FTC.
• Screen or User Names: If collected prior to the date of implementation, consent is not required unless the user associates new identifying information with the user name after the date of implementation.
• Persistent Identifiers: If collected prior to the date of implementation, consent is not required unless the site obtains new information after the date of implementation that allows tracking of a user over time or across websites. There is a technical exception for information collected solely for internal operations of a website.

The revised FAQs continue to provide good examples of both best practices and safe harbors regarding COPPA, and are definitely worth a review.

• Print
• Comments
• Trackbacks
• Share Link

Contributed by Tris Fall

For better or worse, not all franchises last forever.  For various reasons, a franchise relationship sometimes terminates – sometimes on amicable terms; other times, not so much.  Unless the franchisee is subject to a non-compete covenant, the franchisee often continues in the same business as the franchise operation, even after the franchise relationship has ended.  

And, not wanting to lose any customers, the former franchisee may seek to tread as closely as possible to the way things worked under the franchise.  It may try to continue to use the same color scheme, same manner of operations and even a similar name. Of course, the former franchisee has to do this without violating the franchisor's intellectual property rights.  The tough question is how close is too close.  

A recent decision from the U.S. District Court for the Middle District of Florida sheds some light on this predicament.  In You Fit, Inc. v. Pleasanton Fitness, LLC, You Fit (the franchisor) had granted a franchise to the defendants (the franchisee) for the operation of a series of health clubs under the name "You Fit".  

For reasons unknown, the franchise relationship ended, but the defendants continued to operate health clubs.  Not wanting to violate You Fit's trademark, but still wanting to retain their customer base, the defendants opted to do business as "Fit U" (ostensibly an abbreviation of "Fitness Unlimited").  As it turns out, this was a poor decision.   

You Fit sued in federal court for trademark infringement, unfair competition and related claims.  In evaluating the various factors that go into a "likelihood of confusion" (the test for trademark infringement), the court determined that the mark "YOU FIT" was suggestive, and therefore entitled to a heightened level of protection, even though the words "you" and "fit" were commonly used by others in the fitness market.  The court also decided that the marks "YOU FIT" and "FIT U" were "very similar", despite the fact that one was essentially a transposition of the other.  In evaluating the actual confusion factor, the court quoted a post from the popular website Yelp, in which a consumer stated that she was confused by the "Fit U" health club, noting that it shared a similar name and the "same basic color scheme" as did You Fit.  The Yelp post concluded with "Very confusing and a big let down."  

On balance, the court concluded that the plaintiff franchisor had satisfied that a likelihood of confusion existed between these two marks and ruled in favor of the franchisor.  The defendant former franchisee was enjoined from using the mark "FIT U" "or otherwise using 'Fit ' in any manner in the offer, sale, or advertising of any goods or services".  

This case demonstrates that franchisors who are dissatisfied with the steps that a former franchisee has taken to distance itself from the franchise have a powerful means of enforcing their rights.  It also should serve as a cautionary tale to former franchisees who are trying to remain as close as possible to what they previously did as a franchisee.  In general, a former franchisee is best advised to distance itself from the franchise in every way that it can, so as to avoid an outcome like that suffered by in this case.

• Print
• Comments
• Trackbacks
• Share Link

Okay, so you're aware that the FTC issued new guidelines last month regarding the responsibilities bloggers and other social media users have to disclose sponsored content or free product samples in exchange for reviews.

Moreover, maybe you're like me, and when you read the new guidelines, you thought, "Okay. That sounds pretty close to the types of disclaimers and disclosures the FTC has always required for advertising and endorsements."

But then it hit you right between the eyes. How in the world do I do that in 140 characters? Well, Angie Pascale over at Location3 posted today at her blog the "quick and dirty" on what all brands must know for their social media outreach programs. The significant takeaways?

1. Proximal Placement is Priceless: put the disclosure next to the claim or item being advertised.
2. Disclosure Bookends:  product reviewer disclosures need to come at the beginning and the end of reviews or sponsored content where product or discounts were provided in exchange.
3. Tweets are NOT Exempt: make sure the tweet plainly discloses that it is an advertisement and any necessary disclosures (like the "typical" results for a weight-loss product).
4. No More Cryptic Shortened URLs: make the hyperlink obvious.

Angie notes correctly that the guidelines are not law.  However, anyone choosing not to follow them is risking FTC action against the brand and/or the blogger. Angie has several other good ideas posted on the blog regarding the new guidelines. I highly encourage a read.

Finally, thanks are due to Jennifer MacDonald at Engage121, whose tweet today alerted me to Angie's great post.

• Print
• Comments (1)
• Trackbacks
• Share Link

Contributed by Christina A. Stoneburner

Recently, the Supreme Court of Illinois upheld a damages award against an employer who took it upon itself to go to some unorthodox lengths to determine if a former employee had violated a non-competition agreement.  Although this has been a hot topic in some of the franchise world’s forums, I must say I am a little surprised by the sweeping declarations that “pre-texting” cannot be used in any circumstances.

Let’s review the very egregious facts of the case in question, Lawlor v. North American Corporation of Illinois.  In Lawlor, the employer hired counsel and an investigator to try to determine if Ms. Lawlor had violated a non-competition agreement.  In order to try to prove their case, the company turned over Ms. Lawlor’s address, Social Security number, and telephone numbers.  The private investigators then pretended to be Ms. Lawlor, contacted her telephone providers, and requested duplicate copies of her phone records.

Is anyone shocked that committing identity theft and obtaining phone records under false pretenses is against the law and could result in liability? I should hope not. Does this necessarily mean that “mystery shoppers” cannot be used by franchisors to investigate franchisees?  I don’t think so.

A mystery shopper is not at all similar to the “pre-texting” that went on in the Lawlor case or in the well-publicized HP pre-texting scandal.  Instead, a mystery shopper is contacting the company like any other customer, speaking with sales personnel, and purchasing product to determine quality of service.  The information the mystery shopper is getting is the same information that any member of the general public gets when transacting business with the company.  

In short, I do not think the Lawlor case is the death knell of mystery shopper programs.

Further, I cannot imagine how any franchisee could legitimately complain about a bad review by a mystery shopper.  What argument would be advanced by the franchisee?  “If I had known you represented the franchisor, I would have treated you better than any of my other customers.”  I do not see much jury appeal in that argument. 

• Print
• Comments
• Trackbacks
• Share Link

Our own Eleanor Vaida Gerhards was recently interviewed by Reputation Capital on the topic of legal blogging. Eleanor discusses how blogging fits into marketing strategy and the value of blogs (including of course, the Franchise Law Update) in relating to clients and potential clients.

You can read the full interview here.

• Print
• Comments
• Trackbacks
• Share Link

Struggling franchisors who violate state franchise disclosure laws should not assume that the filing of bankruptcy by the franchisor will bring relief from the claims of wronged franchisees. A Bankruptcy Court in North Carolina recently ruled that Michael and Kathy Butler, husband and wife owners of PRS Franchise Systems, LLC were personally liable to one its franchisees for $714,000 plus interest.

PRS Franchise was a North Carolina based franchisor offering retail franchises selling promotional and advertising services to small businesses. The franchisee, New York resident John Mangione, bought 12 PR Store franchises in New York in 2007. At the time of the sale, PRS Systems was not registered in New York to sell franchises and did not escrow Mangione's franchise fees as required by the New York Department of Law when an franchise registration amendment application is pending.

Unhappy with the situation, Mangione demanded rescission of the franchise agreement and subsequently sued PRS Systems in 2009.  Two months later the Butlers dissolved PRS Systems and filed for personal bankruptcy under Chapter 7. The Butlers hoped to discharge any potential personal liability to Mangione by naming him a debtor in the bankruptcy and valuing his claim at $1.00.   Mangione filed an action asking the court to declare the debt non-dischargable under 523(a)(2) and (4) of the United States Bankruptcy Code on the basis of the Butler's fraud. 

The Bankruptcy court found the owners personally liable under New York law. The court found no merit in the Butler's argument that each was uninvolved in the sales process. The court decision details the personal interaction between the Butlers and Mangione, and Mangione's reliance on the owners' promises and experience in the PR business. In addition, because an FDD was not provided to Mangione, he was not privy to PRS Systems 's abysmal financial statements. Testimony also confirmed that the Butler's intentionally let the franchisor's New York registration lapse and made only a half-hearted effort to reinstate it when Mangione showed interest in purchasing franchises.

The full text of the opinion can be found here.

• Print
• Comments
• Trackbacks
• Share Link

Several news outlets, including The Wall Street Journal and USA Today, are reporting that a judge has entered an injunction halting New York City and Mayor Bloomberg's sugary drink ban, which was scheduled to go into effect  on March 12th.

The state court judge concluded that the sugary drink regulations are fraught with arbitrary and capricious consequences. The court pointed out that certain stores, such as convenience stores and supermarkets, would not be subject to the regulations. It was also reported today that Starbucks did not intend to follow the regulation, considering itself exempt. These many "loopholes," said the judge, effectively defeat the purpose of the regulation.

The court further found that the City only has the right to regulate the food supply when the City faces imminent threat from disease. The court held that high standard had not been met in this case.

We will continue to watch and report what happens with this ruling and upcoming appeals.

• Print
• Comments
• Trackbacks
• Share Link